Apple prices $17 bln bond deal to strong demand

BenEisen

NEW YORK (MarketWatch) — Apple Inc. priced a supersized $17 billion corporate bond deal Tuesday, the largest ever for a nonfinancial U.S. corporate issuer.

The bond issuance comes in six parts as Apple
AAPL, -1.16%
uses its first debt offering in more than 15 years to help finance a $100 billion return to shareholders. When reporting earnings last week, the company said it would return funds to shareholders by increasing quarterly dividends and buybacks.

Large demand allowed Apple to get favorable rates on the deal, said Austin Berkelhammer, head trader at HFP Capital Markets.

“Everyone is looking for high-grade debt,” Berkelhammer said.

The 3-year notes priced at 20 basis points above the 3-year fixed-rate Treasury note
US:3_YEAR
which last traded at 0.311%, he said. The 5-year Apple fixed-rate note priced 40 basis points over the 5-year Treasury note
US:5_YEAR
which last traded at 0.681%. The 10-year Apple note sold at 75 basis points over the 10-year Treasury note
US:10_YEAR
which last traded at 1.673%. The 30-year Apple note sold at 100 basis points over the 30-year Treasury bond
US:30_YEAR
which last traded at 2.879%.

Apple has cash reserves of $144 billion, but those are largely held overseas, necessitating debt issuance to avoid repatriation of taxes.
Gerald Granovsky, Moody’s

The Apple offering topples Roche Holdings Inc.’s $16.5 billion deal, sold in 2009, from the perch of largest U.S. nonfinancial corporate issue, according to data from Dealogic. Abbott Laboratories
ABT, -0.60% raised $14.7 billion last fall as Treasury rates lingered near record lows. The Abbott bonds priced at 2.795% for the 10-year.

Moody’s gave the Apple bonds its second-highest rating of Aa1 and said it considered the debt issuance a credit-negative for the company.

“As we expect growth to inevitably slow, the company’s high cash balance relative to earnings growth will hurt its return on equity and return on assets metrics, which will likely increase pressure from shareholders to return cash,” said Granovsky.

S&P assigned its second-highest rating of AA-plus rating to Apple. Fitch Ratings doesn’t rate the bonds formally, but said it wouldn’t assign a top rating.

Treasurys step back

The large size of the Apple deal caused Treasurys to pare back gains Tuesday as investors shifted the allocation of their assets from the safe haven of Treasurys to the high-grade Apple debt.

“That is a lot of high quality supply,” said Ian Lyngen senior rates strategist at CRT Capital Group LLC, in a note, referring to the $17 billion Apple deal.

Treasurys hit a new yearly low at 1.638% Tuesday morning after the Chicago Purchasing Managers index reading hit a more-than three-year low. The 10-year Treasury note ended the day barely changed, with the yield at 1.674%.

The Chicago PMI fell to 49 in April, down from 52.4 in March and below expectations of 52.5 from economists polled by MarketWatch. It is the last of the regional economic indicators before the widely followed Institute for Supply Management’s manufacturing index, out Wednesday, and the latest sign of a potential economic slowdown.

Benchmark government debt has tended to attract investors looking for income as a hedge against slowing economic growth that could crimp corporate profits and by extension, stock prices.

Treasurys had been higher, with yields falling, ahead of the Chicago PMI data as the market awaited monetary policy guidance from the Federal Open Market Committee Wednesday and the European Central Bank Thursday,

The Fed is widely expected to keep its easy money policies intact when it announces policy decisions Wednesday, which would keep rates low in the near-term. The ECB is widely expected to cut its benchmark rates on Thursday.

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